chapter  8
8 Pages

Aggregate System Performance and Comparisons

If equations (4) and (5) are realistic, then (3) should be viewed as a reduced-form equation where all the complex relationships among the variables in ok> ek, sk, and Uk have been 'netted out.' It is implicit in equations (3) to (5) that the policies of participants are shaped by their preferences. But in actual econometric comparisons, it is not likely that policies can be derived from the limited knowledge available of the preferences even of major policy makers, let alone of ordinary workers and consumers, or that the policies adopted are necessarily the optimal ones. For this reason, it may be more realistic to rewrite equation (1) as:

(k = 1, ... , K) (3 ') where Psk denotes the policies open to decision makers in system k (Koopmans and Montias, 1971).